Revising Consolidated Return Regulations and Controlled Group of Corporations Regulations To Reflect Statutory Changes, Modernize Language, and Enhance Clarity, 106884-106886 [2024-29481]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Proposed Rules]
[Pages 106884-106886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29481]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / 
Proposed Rules

[[Page 106884]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-134420-10]
RIN 1545-BJ87


Revising Consolidated Return Regulations and Controlled Group of 
Corporations Regulations To Reflect Statutory Changes, Modernize 
Language, and Enhance Clarity

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that affect 
affiliated groups of corporations that file consolidated Federal income 
tax returns. These regulations would modify the consolidated return 
regulations to clarify that, in the case of certain transfers between 
members of a consolidated group, a transferee's assumption of certain 
liabilities will not reduce the transferor's basis in the transferee's 
stock received in the transfer. Final regulations modifying other 
consolidated return regulations are published in the Rules section of 
this issue of the Federal Register.

DATES: Written or electronic comments as well as requests for a public 
hearing must be received by March 31, 2025. Requests for a public 
hearing must be submitted as prescribed in the ``Comments and Requests 
for a Public Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-
134420-10). Once submitted to the Federal eRulemaking Portal, comments 
cannot be edited or withdrawn. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically or on paper to its public docket.
    Send paper submissions to: CC:PA:01:PR (REG-134420-10), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact William W. Burhop at (202) 317-5363 or Kelton P. Frye at (202) 
317-5135 (not toll-free numbers); concerning the submission of comments 
and/or requests for a public hearing, contact the Publications and 
Regulations Section of the Office of Associate Chief Counsel (Procedure 
and Administration) by email at [email protected] (preferred) or 
by phone at (202) 317-5306 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    Section 1502 authorizes the Secretary of the Treasury or her 
delegate (Secretary) to prescribe consolidated return regulations for 
an affiliated group of corporations that join in filing (or that are 
required to join in filing) a consolidated return (consolidated group) 
to clearly reflect the Federal income tax liability of the consolidated 
group and to prevent avoidance of such tax liability. See Sec.  1.1502-
1(h) (defining the term ``consolidated group''). For purposes of 
carrying out those objectives, section 1502 also permits the Secretary 
to prescribe rules that may be different from the provisions of chapter 
1 of the Code (chapter 1) that would apply if the corporations 
composing the consolidated group filed separate returns. Additionally, 
section 7805(a) of the Code authorizes the Secretary to ``prescribe all 
needful rules and regulations for the enforcement of [the Code], 
including all rules and regulations as may be necessary by reason of 
any alteration of law in relation to internal revenue.''

Background

    This notice of proposed rulemaking contains proposed regulations 
under section 1502 of the Internal Revenue Code (Code) that would 
revise the Income Tax Regulations (26 CFR part 1) issued under section 
1502 (consolidated return regulations). Terms used in the consolidated 
return regulations generally are defined in Sec.  1.1502-1.

I. Section 357(c) and Sec.  1.1502-80(d)

    Section 1.1502-80 provides generally that: (i) the Code, or other 
law, is applicable to a consolidated group to the extent the 
consolidated return regulations do not exclude its application; and 
(ii) to the extent not excluded, other rules operate in addition to, 
and may be modified by, the consolidated return regulations. See Sec.  
1.1502-80(a)(1). Section 1.1502-80(d) provides that section 357(c) of 
the Code does not apply to any transaction to which Sec.  1.1502-13 and 
other specified sections of the consolidated return regulations apply.
    As discussed in the preamble to proposed regulations (REG-137519-
01) published in the Federal Register (66 FR 57021, 57022) on November 
14, 2001 (proposed consolidated section 357(c) regulations), because 
section 357(c) does not apply to certain intragroup section 351 
exchanges (that is, exchanges between members of a consolidated group 
to which section 351 of the Code applies) under Sec.  1.1502-80(d), a 
concern arose that no liabilities can technically be excluded under 
section 357(c)(3). Therefore, in such an intragroup section 351 
exchange, the transferor's basis in the stock of the transferee 
received in the transfer first would be reduced by liabilities assumed 
by the transferee, including those liabilities described in section 
357(c)(3) that would not have reduced basis had section 357(c) applied. 
The transferor's basis in the stock of the transferee then would be 
reduced a second time under the principles of Sec.  1.1502-32 at the 
time the liability does in fact give rise to a deduction on the part of 
the transferee and is taken into account on the consolidated return. 
This result ultimately could cause the transferor to recognize an 
amount of gain on the sale of the stock of the transferee that does not 
clearly reflect income.
    The Treasury Department and the IRS published the proposed 
consolidated section 357(c) regulations to eliminate potential 
duplicative stock basis reductions arising from such transactions. As 
discussed in the preamble to the proposed consolidated section 357(c) 
regulations, those proposed regulations were published to clarify that, 
in certain transfers described in section 351 of the Code between 
members of a consolidated group, a transferee's assumption of

[[Page 106885]]

liabilities described in section 357(c)(3)(A), other than those also 
described in section 357(c)(3)(B), will not reduce the transferor's 
basis in the transferee's stock received in the exchange.

II. 2023 Proposed Regulations

    On August 7, 2023, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-134420-10) in the Federal Register 
(88 FR 52057) under sections 52(a), 414(b), 1502, 1503, 1552, and 1563 
of the Code (2023 proposed regulations). The 2023 proposed regulations 
primarily would revise the consolidated return regulations and the 
controlled group of corporations regulations (i) to eliminate obsolete 
or otherwise outdated provisions, (ii) to modernize the language and 
improve the clarity of the regulations, and (iii) to facilitate 
taxpayer compliance. The 2023 proposed regulations are adopted as final 
regulations (T.D. 10018) published in the Rules section in this issue 
of the Federal Register.
    The preamble to the 2023 proposed regulations stated that the 
proposed rule in the proposed consolidated section 357(c) regulations 
is unnecessary because Sec. Sec.  1.1502-32 and 1.1502-80 prevent any 
duplicative stock basis reduction. Accordingly, the 2023 proposed 
regulations withdrew the proposed consolidated section 357(c) 
regulations.

III. Comment Received

    A commenter stated that, in light of the withdrawal of the proposed 
consolidated section 357(c) regulations, it is unclear whether the 
transferor's basis in the transferee stock should be reduced for an 
assumed section 357(c)(3)(A) liability: (i) at the time of the section 
351 exchange under section 358 of the Code, with no further basis 
reduction under Sec.  1.1502-32(b) when the assumed section 
357(c)(3)(A) liability generates a deduction that is absorbed (front-
end adjustment); or (ii) at the time the deduction for the assumed 
section 357(c)(3)(A) liability is absorbed that reduces basis under 
Sec.  1.1502-32(b), with no prior basis reduction under section 358 at 
the time of the section 351 exchange (back-end adjustment). The 
commenter recommended the back-end adjustment approach for various 
reasons, including the additional compliance costs and complexity 
associated with tracking and monitoring the transferee's Sec.  1.1502-
32(b) basis adjustments (potentially over multiple years, and 
potentially across multiple groups) under the front-end adjustment 
approach. The commenter also expressed the view that the back-end 
adjustment approach is the prevailing approach currently applied by 
taxpayers.

Explanation of Provisions

    The withdrawal of the proposed consolidated section 357(c) 
regulations was not intended to suggest that a front-end adjustment 
approach is required. To reflect the Treasury Department's and the 
IRS's view regarding the appropriate timing for the single basis 
reduction for an assumed section 357(c)(3)(A) liability, and to clarify 
that a back-end adjustment is appropriate, this document would 
repropose the proposed consolidated section 357(c) regulations in 
modified form.

Proposed Applicability Date

    Pursuant to section 1503(a) of the Code, these proposed regulations 
would apply to consolidated return years for which the due date of the 
return (without regard to extensions) is after [date of publication of 
final regulations in the Federal Register].

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    These regulations update the regulations under section 1502 to 
clarify the timing of a single basis adjustment required by statute. 
Therefore, the proposed regulations would not impose additional 
reporting burden beyond what is otherwise required by existing 
statutes, regulations, and forms. The total burden associated with the 
proposed regulations, if finalized in their current form, would be $0.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
the Secretary of the Treasury certifies that the proposed regulations 
would not have a significant economic impact on a substantial number of 
small entities. This certification is based on the fact that the 
proposed regulations would apply only to corporations that file 
consolidated Federal income tax returns, and that such corporations 
tend to be larger businesses. Therefore, the proposed regulations would 
not create additional obligations for, or impose an economic impact on, 
small entities. Accordingly, the Secretary certifies that these 
proposed regulations will not have significant economic impact on a 
significant number of small entities.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
have been submitted to the Chief Counsel for the Office of Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The proposed regulations do not propose any rule that would 
include any Federal mandate that may result in expenditures by State, 
local, or Tribal governments, or by the private sector in excess of 
that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The proposed regulations do not 
propose rules that would have federalism implications, impose 
substantial direct compliance costs on State and local governments, or 
preempt State law within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations. All commenters are strongly encouraged to 
submit comments electronically. The Treasury Department and the IRS 
will publish for public availability any comment submitted 
electronically or on paper to its public docket on https://www.regulations.gov.
    A public hearing will be scheduled if requested in writing by any 
person who

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timely submits electronic or written comments. Requests for a public 
hearing are encouraged to be made electronically. If a public hearing 
is scheduled, a notice of the date and time for the public hearing will 
be published in the Federal Register.

Drafting Information

    The principal authors of this document are William W. Burhop and 
Kelton P. Frye of the Office of Associate Chief Counsel (Corporate). 
Other personnel from the Treasury Department and the IRS participated 
in its development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.1502-80 is amended by revising paragraph (d)(1) and 
adding paragraphs (d)(3) and (4) to read as follows:


Sec.  1.1502-80  Applicability of other provisions of law.

* * * * *
    (d) * * *
    (1) In general. Section 357(c) does not apply to any transaction to 
which Sec.  1.1502-13 applies if it occurs in a consolidated return 
year beginning on or after [date of publication of final regulations in 
the Federal Register]. Notwithstanding the foregoing, for purposes of 
determining the transferor's basis in property under section 358(a) 
received in a transfer described in section 351, section 358(d)(2) 
operates to exclude liabilities described in section 357(c)(3)(A), 
other than those also described in section 357(c)(3)(B), from the 
computation of the amount of liabilities assumed that is treated as 
money received under section 358(d)(1), if the transfer occurs in a 
consolidated return year beginning after [date of publication of final 
regulations in the Federal Register]. This paragraph (d) does not apply 
to a transaction if the transferor or transferee becomes a nonmember as 
part of the same plan or arrangement. The transferor (or transferee) is 
treated as becoming a nonmember once it is no longer a member of a 
consolidated group that includes the transferee (or transferor). For 
purposes of this paragraph (d), any reference to a transferor or 
transferee includes, as the context may require, a reference to a 
successor or predecessor.
* * * * *
    (3) Examples. The principles of paragraph (d)(1) of this section 
are illustrated by the following examples.
    (i) Example 1--(A) Facts. P, S, and T are members of a consolidated 
group. P owns all the stock of S and T with bases of $30 and $20, 
respectively. S has a $30 basis in its assets and $40 of liabilities. S 
merges into T in a transaction described in section 368(a)(1)(A) (and 
in section 368(a)(1)(D)).
    (B) Analysis. Section 357(c) does not apply to the merger. P's 
basis in T's stock increases to $50 ($30 + $20), and T succeeds to S's 
$30 basis in the assets transferred subject to the $40 liability. 
Similarly, if S instead transferred its assets and liabilities to a 
newly formed subsidiary in a transaction to which section 351 applies, 
section 357(c) does not apply, and S's basis in the subsidiary's stock 
is a $10 excess loss account.
    (ii) Example 2--(A) Facts. P owns all the stock of S1. S1 has 
assets with a total fair market value equal to $100 and an aggregate 
basis of $30. S1 has $40 of liabilities, $5 of which are described in 
section 357(c)(3)(A), but not section 357(c)(3)(B), and $35 of which 
are not described in section 357(c)(3)(A). S1 transfers its assets to a 
newly formed subsidiary, S2, in exchange for stock of S2 and S2's 
assumption of the liabilities of $40 in a transaction to which section 
351 applies. P, S1, and S2 are members of a consolidated group.
    (B) Analysis. Section 357(c) does not apply to cause S1 to 
recognize gain in connection with the transfer. For purposes of 
determining S1's basis in the S2 stock it received in the exchange, 
section 358(d)(2) operates to exclude $5 of the liabilities from the 
computation of the amount of liabilities assumed that are treated as 
money received under section 358(d)(1). S1's basis in the S2 stock 
received in the exchange is a $5 excess loss account (reflecting its 
$30 basis in the assets transferred reduced by $35, the amount of 
liabilities assumed that are not described in section 357(c)(3)(A)).
    (4) Applicability dates. Paragraphs (d)(1) and (3) of this section 
apply to consolidated return years for which the due date of the return 
(without regard to extensions) is after [date of publication of final 
regulations in the Federal Register]. For rules that apply to earlier 
taxable years, see Sec.  1.1502-80(d) as contained in 26 CFR part 1, 
revised April 1, 2024.
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-29481 Filed 12-27-24; 8:45 am]
BILLING CODE 4830-01-P